Excerpts from DBS report

Analyst: Lee Keng LING

Moulding for growth
• Turnaround in manufacturing across all regions

FU YU

Share price: 
28.5 c

Target: 
35 c

• Favourable shift in product mix towards higher profitability and growth potential
• Improving margins; high cash level (0.11 Scts/share) and attractive yield at 6.4%
• Initiate with BUY and TP of S$0.35


Turnaround in manufacturing across all regions. Manufacturing PMIs in China, Singapore, and Malaysia, where Fu Yu’s manufacturing facilities are located, are indicating an expansion in the manufacturing sector.

FuYu machine1.20Fu Yu produces parts for products in various industries. Photo: Company
We believe that this will lead to an uptick in earnings for Fu Yu.

Emphasis on products with higher profitability and growth potential. Part of the Group’s business strategy is to shift towards producing parts for products in the consumer, medical, and automotive space, which have higher profitability and growth potential, as compared to printing and imaging segment.

Cost efficiency to improve margins. Fu Yu is also expanding its margins through cost enhancement initiatives.

The redevelopment of its Singapore factory and consolidation of its China operations in Shanghai and Suzhou will further lift normalised net profit margins to 8.2% in FY2020F, from 5.4% in FY2018.

Strong financial positioning. Fu Yu has a high cash level and no debt.

Its cash level is equivalent to 44.1% of its market capitalisation and 37.7% of total assets. It has an attractive dividend yield of c.6.4% in FY2019F and TTM EV/EBITDA of 4.4x, vs peers of 6 to 7x.

Valuation:
Initiate with BUY and TP of S$0.35. Our TP is pegged to FY2020F forward PE of 16.0x, which is +1.0 SD its historical 5-year average.

The current recovery of the manufacturing cycle across its operating regions, as well as its business strategies, presents an opportunity for a re-rating of the stock’s forward PE.

Ex-cash, Fu Yu is trading at an attractive FY2020F PE of 7.2x.


Key Risks to Our View: Slowdown in manufacturing activity, increasing competition, escalation of the US-China Trade War, sharp decline in USDSGD


Full report here